Hong Kong tycoons face ‘eviction’

Commentary: China Mobile could shake up local wireless industry

HONG KONG (MarketWatch) — If your lease is up in Hong Kong, then often so is your luck. There is little time for sentimentality when rents are reviewed.

It’s an all too familiar story, where decades old businesses or restaurants are turfed out to make way for a new tenant — usually a shop targeting free-spending mainland Chinese shoppers.

Reuters

Now in a somewhat ironic twist, the tables could be turned on some of Hong Kong’s biggest developer tycoons. As leases expire on their 3G spectrum licences, it could be their turn to make way for someone with deeper pockets.

According to a recent consultation paper, the government is ready to put one-third of 3G licence holders’ existing spectrum up for re-auction. The reason for this appears to be that mainland Chinese behemoth China Mobile
0941, +0.70%CHL, -0.06%
is angling to enter the Hong Kong market. If this goes through, it could trigger an upheaval in the existing order.

Such a move certainly promises to be intriguing. It pits China’s largest state-owned wireless carrier, with its 710 million subscribers, against the wireless businesses of Hong Kong’s most powerful families.

These include Hutchison Telecom
0215, -0.83%
the local wireless unit of Asia’s richest man Li Ka-shing, as well as another 3G licence holder, PCCW’s
0008, +1.72%PCWLF, +2.55%
HKT, controlled by Li’s son Richard.

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Another reason this spectrum grab is guaranteed to spark controversy is that it comes at a time of growing sensitivity over a mainland Chinese tourist invasion. A deluge of tourists have been blamed for everything from shortages in baby-milk powder and hospital beds, to pushing up property prices.

Although the re-auction of spectrum is not planned until 2016, local operators have been quick to protest. They complain this spectrum loss will lead to a drop in service quality for customers and is unfair, given the investments made in networks to date. Hong Kong’s Legislative Council is due to debate the issue later this month.

Given the current climate, it would be easy enough to play on local fears of a mainland Chinese takeover of Hong Kong. Yet this could be counterproductive. Not only would it damage relations between Hong Kong and Beijing, but the same tycoons also have sizeable business interests from retail to property, which benefit from the tourist trade.

And while locals might miss their favorite noodle shop, a hard-luck story from these wireless operators might get a less sympathetic hearing.

One conclusion is that the incumbents just want to avoid new competition.

The telecoms industry in Hong Kong stands out for having a rigorous competition policy, which has helped drive down basic phone charges and push penetration rates over 200%. In many industries in Hong Kong, life is certainly easier with oligopolies or monopolies still intact, thanks to the absence of any competition law.

China Mobile’s interest in this spectrum is also worth exploring. With its huge subscriber base, you might ask why it would bother with little Hong Kong. And it already has a foothold in Hong Kong after buying Peoples Phone, although that is just a 2G operation.

One possibility is the spectrum could help it push out China’s high-speed wireless technology standard, TD-SCDMA, or the 4G version, TD LTE. A successful debut in Hong Kong could be a good shop window for other ventures overseas.

Another reason for moving into Hong Kong is simply to follow its customers. Over 30 million mainland tourists hopped over to Hong Kong last year alone. And by 2016, you can expect that number will have swelled further. By then, Hong Kong will have a bridge connecting with neighbor Macau and Zhuhai and a new high-speed rail link with the mainland.

Being separated by two different mobile networks is inconvenient, particularly when you factor in penal roaming charges. Currently, such charges are so high, it’s normal to either turn off your phone or use another phone altogether.

In Europe, regulators have mandated caps on roaming charges. This is an example Hong Kong’s regulator should follow, making any spectrum acquisition conditional on lowering data and voice-roaming charges.

This would be a pro-competitive move and could help win support for China Mobile’s arrival. So far with People’s Phone, China Mobile has been slow to lower roaming charges.

And while such a ruling might eat into lucrative roaming fees but it should persuade more people to switch on their phones or data-roaming when traveling.

If China Mobile does get the nod to bid for spectrum, it could send shock waves across the industry. China’s other mobile operators China Telecom
0728, +0.81%CHA, -0.37%
and China Unicom
0762, +1.72%CHU, +0.66%
may not be far behind looking for local acquisitions.

Ultimately, if this Chinese invasion helps lower rather than raise prices, it should be welcomed.

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